Though there are still over 450 days to go until the 2020 presidential election, the pundit class is all abuzz with predictions and forecasts regarding the outcome. Depending on whom you ask, President Trump is either a lock for reelection or doomed to defeat, and the lack of a middle ground suggests wishful thinking is at work. Because the fact of the matter is that 2016 humbled (or should have humbled) the political-forecasting industry, and that this particular president has shown time and again that the normal rules of politics don’t apply to him.
If Trump were a more “normal” president, his reelection chances would likely hinge on his record. The strength of the economy on his watch, the quality of the judges he’s placed on the bench, and the campaign promises he’s kept (withdrawing from the Paris Accord and the Iran deal, moving the U.S. embassy to Jerusalem) would all be enough to see him reelected. But Trump is not a normal president. His erratic behavior and temperament are at the heart of a persona that turns off significant numbers of voters in key demographics. So 2020 will pit his policy achievements vs. his persona. Therein will lie the rub.
Or that’s one way of looking at it, anyway. Here’s another: In the last 100 years, the stock market has actually proven a rather pristine indicator of an incumbent candidate’s or party’s chances of reelection.
Let’s start with one indisputable fact: Those who dismiss the stock market’s health as a mere indicator of “how the 1 percent are doing” only do so when the other party is enjoying a strong stock market or their party is suffering through a bad one. Those now arguing that Trump shouldn’t get credit for the strength of the market on his watch are the exact same people who credited President Obama for the market’s recovery on his watch and ridiculed President George W. Bush for the market’s decline on his. They should be ignored, and the historical evidence should be heeded.
Let’s start back in the 1920, when Warren Harding and Calvin Coolidge won a landslide victory over James M. Cox and Franklin Delano Roosevelt. Three years later, when Harding died, Coolidge began a presidency that would see a record-setting 231 percent market return. Suffice it to say, Coolidge was reelected in 1924 in a huge landslide, and would have won in 1928 had he chosen to run. Instead, the incumbent Republican party won (with Herbert Hoover), and Coolidge left office having presided over a period of unprecedented economic prosperity and record budget surpluses.
Then came Hoover. The onset of the Great Depression led to market drops of 12 percent, 28 percent, 47 percent, and 15 percent, respectively, in his four years in office. Unsurprisingly, Roosevelt trounced him to take the White House in 1932.
Roosevelt, of course, would be reelected three times, serving as president until he died twelve years later. While he assumed office saddled with an economy still feeling the effects of the 1929 crash, the market grew all told by 198.6 percent in those twelve years. And even if it hadn’t, that the second half of Roosevelt’s tenure was defined by World War II would have been enough to make him a legitimate outlier from the trend.
Few in the 75 years since World War II ended and Roosevelt died have bucked that trend. The first couple of elections after the war came closest. After taking over upon Roosevelt’s death in 1945, Truman won a full term three years later despite the fact that the market had remained flat in both 1947 and 1948. But a few things needs to be said: (a) the market ended 1945 up 31 percent; (b) Truman ended World War II; and (c) Truman still barely won despite taking over for one of the most popular presidents in history. Dwight Eisenhower’s defeat of Adlai Stevenson is the only clear exception to the rule I can find over the last 100 years. The market ended 1950 up 22 percent, 1951 up 16 percent, and 1952 up 11 percent, yet Stevenson, the standard-bearer of the incumbent Democrats, lost to Eisenhower handily.
In 1956, Eisenhower won reelection, coming off of a record 45 percent return for the market in 1954 and a 26 percent return in 1955. That in 1956 the market saw only a 3 percent return was immaterial after the massive successes of the previous two years. But a 14 percent market drop in 1957 and a 3 percent drop in the election year of 1960 doomed Eisenhower’s vice president, Richard Nixon, who lost to John Kennedy.
Three years later, Kennedy was assassinated, and Vice President Lyndon Johnson took over. When he sought a full term the next year, Johnson may have faced a beatable candidate in Barry Goldwater and a nation still mourning Kennedy’s loss, but a 19 percent market return in 1963 and a 13 percent return in 1964 did not hurt. Conventional wisdom holds that Vietnam and the social unrest of the late 1960s eventually made Johnson’s path to reelection in 1968 untenable. But stocks saw a 13 percent drop in the middle of his term and remained flat from the beginning of 1968 until he dropped out of the Democratic primaries at the end of March, which reinforces the point: Reelection for an incumbent candidate or party is hard without a strong market!
Nixon, of course, took over from Johnson at the beginning of the next year. A weak opponent helped his chances of re-election, but so did a market that grew 11 percent in 1971 and 16 percent in 1972. Watergate eventually forced him to resign, elevating Gerald Ford to the post. The aftershocks of the scandal and Ford’s pardon of Nixon doubtless would have made it difficult for him to win reelection even with a strong market. But the market’s 30 percent drop his first year in office certainly didn’t help, though its 1975 rebound could have if not for all his other political baggage.
Then there was Jimmy Carter, who had to deal with inflation, high interest rates, and general “economic malaise.” The market dropped 12 percent in Carter’s first year and stayed flat in his second year. I initially thought I had a data point to contend with when I saw that the market grew 25 percent in 1980, but upon further review, almost all of that growth came after it was clear Ronald Reagan would run away with the election. For Carter’s full term, the market remained perfectly flat.
Reagan dealt with a double-dip recession after taking office, which brought the market down 10 percent in his first year. But the market grew 15 percent the next year and 17 percent the year after that, which when coupled with unbelievable GDP growth and reversals of inflationary poison allowed him to win reelection in a historic landslide. There was a market crash in 1987, but the 12 percent return in 1988, and the 150 percent growth over Reagan’s eight years in office, helped Vice President George H. W. Bush win the top job.
Bush had a tougher time in office. The market declined 7 percent in 1990, rebounded nicely in 1991, and then was down for most of 1992, only rebounding after Bill Clinton defeated Bush late in the year to finish with a modest 4 percent return.
Clinton presided over a strong market in the last two years of his first term, with a 34 percent return in 1995 and a 20 percent return in 1996, and trounced Senator Bob Dole to win reelection. From 1997 to 1999, the market set records, and it would finish Clinton’s eight years in office up 226 percent. But the Lewinsky scandal, the NASDAQ’s 40 percent drop, and the broader market’s 10 percent drop in 2000 helped doom Al Gore.
President George W. Bush was popular post-9/11, but the 26 percent market return of 2003 and the 9 percent return of 2004 certainly helped him squeak out a reelection victory over Senator John Kerry. In 2008, the market dropped 40 percent as the country entered its worst economic downturn since the Great Depression, and Senator Barack Obama was easily elected over Senator John McCain.
President Obama struggled with high unemployment and broken promises of economic recovery in his first term. And yet, the market grew 23 percent in 2009, 13 percent in 2010, and 13 percent in 2012, which was enough to counteract the flat year of 2011 and other economic challenges. He beat Mitt Romney, and presided over strong market growth in 2013 that portended a Democratic victory in 2016.
Then, the stock market just stopped growing after it hit a high in mid 2014. For the next two years — a full 24 months! — the market stayed flat. It wouldn’t move again until surging upon Trump’s shock victory in November 2016.
What does all this tell us about Trump’s chances of winning another term next year? The market saw an upward surge from the time of his election through January 2018, but then stayed flat as his trade war ramped up, the Fed’s tightening took a toll, and fears of global recession grew. 2019 has seen the market resume its growth, and talk of Fed easing has given market analysts more to bank on going into the latter portion of the year. Could a market reversal take the wind out of Trump’s electoral sails?
The last 100 years of history tells us that if the stock market is strong in the third and fourth years of a president’s first term, he’s almost guaranteed to win reelection. Though correlation is not causation, and I am aware of some lumpiness and imprecision in a lot of the above analysis, it is rather overwhelming in aggregate, and surely provides a compelling indicator to keep an eye on.
Of course, so much of the Trump era has bucked long-term trends and conventional wisdom that for all we know, the market could tank and he could win, or it could rally further and he could lose. You just never know with Trump. But for my money (and stock portfolio), if you wish to handicap the 2020 race, you should look at the S&P 500. It has, after all, been a reliable political weather vane for the last century.